Still No Recession in the UK as Industry Recovers in Q1 2023
Economic news and commentary for May 12, 2023
UK GDP, Industrial Production, and Trade
The UK economy grew by 0.1% QoQ in Q1 2023. This was identical to the growth of 0.1% QoQ seen in Q4 2022, but better than the 0.0% growth that economists had been expecting. On a monthly basis, however, the momentum of growth was slowing. The first quarter started out with strong growth of 0.5% MoM in January which slowed to 0.0% MoM in February and -0.3% MoM in March. So while the overall quarterly trend pointed to a slightly expanding UK economy, the most recent monthly reading suggests it is now contracting.
The services sector, which accounts for around 80% of the UK economy, grew by 0.1% QoQ in Q1 2023. This was driven by increases in information and communication, and administrative and support service activities. The production sector also grew by 0.1% in Q1 2023 which includes positive results in both the construction sector (0.7% QoQ) and the manufacturing sector (0.5% QoQ). The UK production sector benefitted from a strong increase in industrial production in March, up by 0.7% MoM, which was the strongest monthly growth since May 2021. Additionally, the quarterly increase in industrial production was notable in that it was the first positive quarterly expansion in since Q2 2021 which featured the manufacturing sector up 0.5% QoQ.
In expenditure terms, household consumption (0.1% QoQ) showed little to no growth on the quarter, while there was a positive contribution from gross fixed capital formation (1.3% QoQ). Both imports and exports fell in Q1 2023, the former down -8.1% QoQ and the latter down -7.2% QoQ. The trade deficit declined -1.4% QoQ, and therefore, provided a slight positive contribution to GDP. The monthly trend in trade followed the larger quarterly trend as both imports and exports declined, by -2.8% MoM and -2.3% MoM respectively in March. Trade with the EU was mostly unchanged. Imports from non-EU nations fell -5.9% MoM and exports fell -4.5% MoM.
The latest GDP release is likely to be welcomed by the Bank of England, which is currently raising interest rates in an attempt to bring inflation under control. The fact that the UK has avoided another quarterly contraction suggests that the economy is strong enough to weather further increases in policy rates like the one we saw yesterday. Importantly, the industrial sector is recovering from the lows seen at the end of 2022 which will support growth as the services sector slows down as a result of weaker consumer activity and higher interest rates. However, both are necessary to combat the main drivers of sticky inflation, elevated nominal wage growth and services prices. Because the Bank of England has continued to tighten, it will be very unlikely that the UK avoids a contraction in Q2 2023.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
7:30 pm - Reserve Bank of Australia Minutes
Morning Reading List
Other Data Releases Today
French CPI growth was confirmed at 0.6% MoM and 5.9% YoY in April. Energy was downgraded -0.2 ppts to 6.8% YoY and food inflation was upgraded 0.1 ppts to 15.0% YoY. Goods prices were also revised down , -0.1 ppts to 4.6% YoY.
German trade with China was down -10.5% YoY in Q1 2023 including a -23.9% YoY decline in motor vehicle exports to China. The US is close to overcoming China as the main trading partner with #Germany as trade volumes with the US increase.
US import prices grew 0.4% MoM but were down -4.8% YoY, export prices grew 0.2% MoM but were down -5.9% YoY in April. Fuel imports jumped 4.5% MoM in April after nine months of declines. Fuel import prices down -25.9% YoY.
India's CPI grew 0.5% MoM and 4.7% YoY in April, down from 5.7% YoY in March:
Food: 4.22% YoY
Fuel & Light: 5.5% YoY
Clothing: 7.5% YoY
Transport: 1.2% YoY
Housing: 4.9% YoY
Indian industrial production jumped 8.2% MoM and 1.1% YoY in March. Manufacturing production was mostly unchanged YoY. For the fiscal year (Apr-Mar), industrial production grew 5.1%. Manufacturing production for the fiscal year increased 4.5%.
UK GDP
UK economy sees surprise contraction in March (ING) - UK GDP fell by 0.3% in March, though prior strength means that the first quarter as a whole came in slightly positive. The data is hard to read right now, amplified by the extra Bank Holiday in May. In general, falling gas prices and a resilient jobs market suggests the near-term recession risk has eased.
Bank of England Announcement
Bank of England Review - A data dependent approach (Danske Bank) - In line with our expectation, the BoE today hiked policy rates by 25bp, bringing the Bank Rate to 4.50%. With both growth and domestic inflation having surprised to the topside and given BoE's message today we pencil in an additional 25bp hike in June 2023. We now expect the Bank Rate to peak at 4.75%. We still do not envision rate cuts from BoE before 2024.
US
The Producer Price Index (PPI) Rose 0.2% in April (First Trust Portfolios) - Producer prices bounced back from a steep decline in March to rise 0.2% in April, while the twelve-month comparison moderated to 2.3%. As you can see from the nearby chart, the year-ago comparison for producer prices has been moderating since the 11.7% peak in March 2022.
Building Materials Prices Decline in April Despite Increased Lumber Costs (NAHB) - According to the latest Producer Price Index report, the prices of inputs to residential construction less energy (i.e., building materials) decreased 0.2% in April 2023 (not seasonally adjusted). The index has gained 0.5%, year-to-date, which is the smallest April YTD increase since it climbed 0.3% over the first four months of 2020.
EV manufacturing race: Which US states are taking an early lead? (S&P Global) - We've seen a flurry of announcements about investments in US electric vehicle (EV) and battery facilities, due in part to the passage of the Inflation Reduction Act (IRA) in 2022. These high-profile announcements will create around $80 billion in new investment and 75,000 jobs at face value.
Artificial Intelligence: An Unprecedented Disruption (Goldman Sachs) - Breakthroughs in Artificial Intelligence (AI) and Machine Learning (ML) have the potential to disrupt entire industries as we currently know them. We believe these technologies can generate huge business value across multiple areas, from digital advertising and healthcare to cybersecurity and semiconductors.
Europe
Czech Republic: CPI inflation edges below CNB estimate, challenging possible hike (ING) - In April, headline inflation moderated from 15% to 12.7% year-on-year, mainly due to a slowdown in food inflation. The continuous decline of core inflation for the seventh consecutive month in a row suggests that domestic inflationary pressures are slightly softening.
National Bank of Poland President says discussion about rate cuts is premature (ING) - National Bank of Poland governor Adam Glapinski sees inflation slowing to single digits by year-end. The core rate should decline soon as well. However, he considers the 2023 rate cuts discussion to be premature. Given persistent core inflation, we don’t see scope for rate cuts this year.
Turkey 2023 Presidential Election Scenario Analysis Update (Wells Fargo) - General elections in Turkey are set to take place on May 14, and with the first round of elections this weekend, we updated our election scenario analysis. Typically, we would note that the outcome of the presidential election is not as important as parliament/congressional elections; however, with President Erdogan controlling the overarching policy direction for Turkey—especially economic and monetary policy—the presidential election is more consequential than Turkish parliamentary elections.
Swedish April inflation preview: Temporary pause in the downturn (Nordea) - We see the year-on-year figures for CPIF as well as CPIF ex energy unchanged in April. However, inflation will fall substantially in the coming months. Food prices are finally levelling out.
Are the industry and the Dax going their separate ways? (DWS Group) - The latest order intake and production figures of the German industry seem discouraging at first glance. At second glance, things look less dire.
Mexico
Mexico | Consumption grew 3.4% in April with acceleration of the services sector (BBVA) - The BBVA Research Big Data Consumption Indicator reported an increase of 4.8% MoM in its services component, and a 3.0% MoM in the goods sector.
Inflation
Global Inflation Watch - Diverging core inflation trends (Danske Bank) - Inflation drivers continue to paint a mixed picture, but inflation is likely to head lower through 2023 in the US and euro area. Price pressures from food, freight and energy have clearly eased. Labour markets remain tight, but underlying wage and inflation pressures have showed tentative signs of easing in the US. In euro area, services sector remains the key inflation driver, as price pressures continued to accelerate in April.
Commodities
Copper weakness drags silver lower as gold maintains stability (Saxo Bank) - Copper has broken below key support for the first time in four months with China's weak demand recovery supporting fresh selling by momentum-based funds forcing a reduction from long-term focused bulls. The weakness has spread to silver while gold has only seen some light profit taking following the latest US inflation print. Overall developments that points to patience within the industrial metal complex while gold remains the go to metal at time of heightened uncertainty on many fronts.
Iron ore slump shows Chinese economy is still struggling (ING) - Iron ore’s drop to a five-month low adds to concerns over the strength of China’s economic recovery. We believe iron ore price risks are skewed to the downside.
Markets
S&P Global Investment Manager Index (IMI) reveals risk appetite at survey low in May (S&P Global) - Latest S&P Global Investment Manager Index data revealed that risk sentiment rests at a survey record low in May. Near-term expected returns also sit at its lowest since result collection began in October 2020. Pressure on US equities is expected to further stem from political, monetary and broader US macroeconomic issues. according to the monthly poll of investment managers.
Spring Forward with Munis (Goldman Sachs) - After last year’s re-pricing in fixed income, yield is back, yet cash remains on the sidelines and recent banking sector stress has led investors to seek safety in money market funds.
Outlook
ING Monthly: We’re in a polycrisis – and this is what it means (ING) - There appears to be no respite from seemingly never-ending economic crises and concerns. Our economists and analysts look at what's going on in Europe, Asia and the US.
Research
Nominal Rigidities and the Term Structures of Equity and Bond Returns (Cleveland Fed) - We present a production economy with nominal price rigidities that explains several asset pricing facts, including a downward-sloping term structure of the equity premium, upward sloping term structures of nominal and real interest rates, and the cyclical variation of the term structures. In the model, after a productivity shock a countercyclical labor share exacerbates the procyclicality of dividends, and hence their riskiness, and generates countercyclical inflation.
The Labor Market Effects of Occupational Licensing in the Public Sector (Minneapolis Fed) - In the U.S., occupational licensing is more prevalent in the public sector than in the private sector, but the influence of occupational regulation for public sector workers has not been analyzed in detail. Our study initially examines the probability of a licensed worker selecting into the public sector. Using the probability as a control for these individuals’ risk aversion, we next examine how licensing impacts key labor market outcomes, such as wages, hours worked, and employment in the public sector.
A Theory of Net Capital Flows over the Global Financial Cycle (Dallas Fed) - We develop a theory to account for changes in net capital flows of safe and risky assets over the global financial cycle. We show empirically that countries that have a net debt of safe assets experience a rise in net outflows of safe assets (reduced accumulation of safe debt) during a downturn in the global financial cycle.
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